Alberta Court Clarifies Duty Of Good Faith In Commercial Lease Disputes

An Alberta court decision has clarified when landlords and tenants can be held liable for their tactical decisions and conduct in lease disputes – offering critical guidance for anyone managing commercial property risk. In CNOOC Petroleum North America ULC v. 801 Seventh Inc., 2025 ABKB 145, the Alberta Court of King's Bench examined several noteworthy questions for those involved in commercial leases, including:

1. What are the obligations required by law for remediating asbestos-containing material ("ACM") in commercial properties?
2. Are parties' implied duties of good faith and express duties of mutual cooperation altered once litigation appears imminent?
3. Can a party that is looking to terminate an unfavourable lease "pounce" on an opportunity when it arises, and what are the consequences if they are wrong?

The Court answered these questions as follows:

1. Alberta legislation has stringent, but pragmatic, asbestos remediation requirements. Although circumstance-dependent, Alberta legislation does not strictly require blanket removal of all ACM in a building. Removal is required by law where necessary to correct an unsafe condition (where employee exposure levels are likely to exceed prescribed limits) or to avoid a foreseeably unsafe condition.¹
2. Good faith and honest performance obligations continue to apply even where litigation becomes imminent. That said, good faith obligations are context-dependent. They do not require a party to subvert their own self-interest, and doctrines of legal privilege are paramount to duties of good faith. The prospect of a litigious dispute – and a party's interest in preserving or improving its position in the dispute – are relevant considerations for courts when examining a party's conduct.²
3. "A party may wish to exit a contract for any number of reasons. The law permits it to 'pounce' on a valid opportunity to do so, whenever such an opportunity presents. Pouncing in such circumstances does not constitute a breach of the duty of good faith, let alone bad faith. However, pouncing will constitute a breach of the duty if the opportunity to pounce was orchestrated by the party wanting out of its contract."³ If a party is ultimately wrong about whether grounds for termination exist, they may be in breach of contract, but will not necessarily be in breach of the duty of good faith.⁴

Background of the Dispute

CNOOC Petroleum North America ULC (formerly Nexen Energy ULC, the "Tenant") discovered trace amounts of ACM in the spray-applied fireproofing of a Calgary office building it leased from 801 Seventh Inc (the "Landlord"). The Tenant demanded that all ACM be removed from the building, and subsequently terminated the lease when it became clear that the Landlord would be managing the ACM in place, rather than removing them.

The Tenant alleged that the Landlord's failure to remove the ACM amounted to breaches of the lease that entitled the Tenant to terminate.

The Landlord accused the Tenant of manufacturing a crisis to escape an unfavourable lease. The Landlord alleged that the Tenant wrongfully terminated the lease, and claimed for unpaid rent and loss of future rental payments for the balance of the lease.

Both sides levelled numerous allegations of bad faith against the other in how the other handled the dispute regarding the testing and remediation process and ultimate termination of the lease.

Key Legal Findings

Asbestos Remediation

The central legal and factual issue in this case was whether the Landlord's failure to remove the ACM from the building provided the Tenant with a lawful reason to terminate the lease.

The Court's findings were largely fact specific. However, its reasoning centred on whether there was a risk to human health or safety assessed against objectively recognized standards. The analysis reflected an objective approach guided by the language of the lease, applicable legislation, and commercial reasonableness.

The Tenant's subjective zero-tolerance standard for the presence of asbestos, and the risk that exposure levels might one day reach harmful levels, was found to be "laudable" but not commensurate with the standards imposed by law.⁵ In short, given the measured levels of asbestos in the building, the Landlord's manage-in-place strategy was found to be reasonable and appropriate, and therefore not a breach of the lease.

Duty of Good Faith

Aside from the main dispute, both parties accused the other of breaching the duty of good faith and honest performance.

The Court's approach to these allegations is instructive for parties seeking to balance their rights and obligations in contentious contractual disputes. It recognized the duty of good faith as a central principle of contract law, requiring parties to act honestly, reasonably, and with appropriate regard to each other's legitimate interests, noting that the assessment of "appropriate regard" is context-specific.⁶

In this case, the Court found three breaches of the duties of good faith:

1. The Landlord was found to have:
   • misrepresented informal comments from Alberta Occupational Health & Safety as an official position; and
   • failed to provide an architect-signed safety opinion, as required by the lease.
2. The Tenant was found to have withheld information about asbestos test results for a four-month period.

Despite these specific breaches, the Court dismissed numerous allegations levied by and against each party and held that neither party had engaged in systemic bad faith misconduct. The Court noted that the duty of honest performance specifically prohibits parties from lying or knowingly misleading their counterparties but does not require disclosure beyond refraining from dishonesty. It emphasized that good faith obligations must be interpreted within the broader context of contract law, which allows parties to pursue their own interests provided they do not act in bad faith and subject to legal privilege.

Duty of Good Faith and Honest Performance in Pre-Litigation Conduct

The Court commented on the parties' guarded conduct and communications following the initiation of the dispute, clarifying the balance between contractual good faith obligations and legal rights in contentious litigation. The following principles informed its analysis:

1. The prospect of looming litigation is relevant context that will inform what level of consideration of the counterparty's contractual interests is "appropriate."⁷
2. Legal privilege is presumptively paramount to contractual good faith obligations. The duty to cooperate to achieve the objects of the contract, which may entail that parties share information relevant to the performance of the lease, does not prevail over the confidentiality that privilege protects.⁸
3. A party will not be found in breach of the duties of good faith for acting in its own litigation interests, consistent with the principle that good faith performance does not require a party to subordinate its own interests to the other party.⁹
4. The prospect of litigation does not diminish in any way the parties' obligation of honesty in performing their contract. On this aspect of the duty of good faith, there is no conflict with a litigant's obligations during judicial and quasi-judicial processes. Deceit and obfuscation have no place in either setting. Similarly, litigation is not a license to evade contractual commitments in bad faith.¹⁰

Duty of Good Faith and "Pouncing"

The Landlord argued that the Tenant was motivated to terminate the lease for economic reasons and merely used the presence of ACM as a pretext. The Court confirmed that parties are permitted to "pounce" on valid legal opportunities to exit unfavourable contracts, even if motivated by economic self-interest. Such strategic conduct only becomes problematic if the opportunity itself is dishonestly created or manipulated by the exiting party.¹¹

Thus, the real issue was whether the Tenant had a legal right to terminate the lease. The fact that it may be motivated to exercise that right for different reasons was not an independent breach of the Tenant's duty of good faith.

In this case, the Court found that the Tenant's decision to terminate the lease included economic considerations; however, this strategic move was not manufactured or concocted and therefore did not constitute a breach of good faith.^[12] The Tenant's actions had a basis in fact, and the Court found its safety concerns to be genuine. The Court also noted that the Tenant appeared to have taken legal advice, and did not act capriciously or arbitrarily. The Tenant believed it was legally entitled to have all traces of asbestos removed from the building. While this position was ultimately incorrect, acting on that mistaken legal interpretation did not equate to bad faith.¹³

As a result, the Tenant was liable for terminating the lease without valid grounds but was not separately found liable for breach of the duty of good faith.

Key Takeaways

Although the Court concluded that neither party's broader litigation strategy constituted systemic bad faith, the specific breaches identified provide critical lessons for landlords and tenants alike. Parties must perform contractual obligations honestly and in good faith, even when litigation is looming. This does not require parties to act against their own self-interests, nor does it supersede legal privilege. However, it does mean that parties should:

1. Be accurate in their communications. There are facts, and there are conclusions to be drawn from facts. Be careful to not be seen as presenting the latter as the former. It is acceptable to advocate for a position but it is not acceptable to mislead the other side about the basic facts. When in doubt, consider putting both legal and technical eyes on communications to be sure information is being accurately communicated. In this case, misleading the other party by inaccurately presenting facts breached the duty of honest performance.
2. Share material findings quickly. If material information comes to light that the other party needs to assess and manage risk, provide it promptly, subject only to legitimate claims of privilege. In this case, withholding test results that showed how minimal the ACM amounts were constituted a breach of the duty of good faith.
3. Be mindful of privilege. Properly applied legal privileges are paramount to duties owed to a contractual counterparty, but they need to be applied appropriately. Engage legal counsel early in a brewing dispute to ensure privilege is properly asserted and protected during information collection and sharing.

Further Insight

Readers seeking additional insight on the duty of good faith and honest performance in commercial contracts are encouraged to review the following resources:

• Good Faith in Canadian Contract Law
• Limiting Liability for Duties of Good Faith: California Dreamin'?
• The Supreme Court of Canada Clarifies the Duty to Exercise Contractual Discretion in Good Faith
• Have recent cases imposed a duty to negotiate in good faith?

Footnotes

1.CNOOC Petroleum North America ULC v 801 Seventh Inc, 2025 ABKB 145 at paras 677-680 [CNOOC].

2. Ibid at paras 884-894.

3. Ibid at para 896, citing 2161907 Alberta Ltd v 11180673 Canada Inc, 2021 ONCA 590 at paras 57-58 [Tokyo Smoke].

4. Ibid at para 898, citing Tokyo Smoke, supra note 3 at para 71; 218807 Alberta Ltd v Muslim Assn of Canada Ltd, 2023 ABKB 300 at para 160.

5. Ibid at para 1041.

6. Ibid at para 864, citing Bhasin v Hrynew, 2014 SCC 71 at para 65.

7. Ibid at para 885.

8. Ibid at paras 886-889.

9. Ibid at para 890, citing Quebec (Attorney General) v Pekuakamiulnuatsh Takuhikan, 2024 SCC 39 at para 9.

10. Ibid at paras 892-893.

11. Supra note 3.

12. CNOOC, supra note 1 at paras 899-900.

13. Ibid at para 994.

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